Daily Newsletter, Thursday, 6/7/2018

Table of Contents

Market Wrap

Tech Falls On Profit Taking

by Thomas Hughes

Facebook and tech led the market lower as profit-taking and caution cap recent gains. With the G7 meeting at hand, trade disputes unresolved, scandal in the White House and uncertainty in foreign markets caution is not unwarranted.

Asian markets were mostly higher following Wednesday's rally and comments from the ECB. The ECB has signaled a willingness to wind down its bond-buying program which equates to confidence in the EU's economic health in the minds of traders. The Nikkei led with a gain of 0.81% and was closely followed by most other indices. The Shang Hai Composite was the stand-out laggard with a loss of -0.20%. European markets edged lower on weaker than expected factory orders in Germany. German factory orders fell -2.5% versus an expected gain and cast doubt on overall economic health, but not enough to overshadow the ECB. Regardless, losses were marginal in the range of -0.10%.

Market Statistics

Futures trading indicated a flat to positive open all morning. The trade edged higher as the opening bell approached resulting in an initial gain of 0.25% for the S&P 500. The index moved higher over the first half hour of trading or so, and then began a slow and steady decline that took it back to break even and below. The loss was not large, the sell-off was not broad, but it did shave -0.25% of the broad market before hitting bottom. The intraday bottom was reached at 2 PM when buyers began to step back into the market. The indices were able to recover some of the day's losses before the close but not all, leaving the broad market mixed and without direction.

Economic Calendar

The Economy

Initial claims for unemployment fell -1,000 from last week's upwardly revised figure to hit 222,000. The last week's figure was revised up by 2,000 for a net gain of 1,000 from last week. The four-week moving average rose 2,750 and is now sitting at 225,500. On a not adjusted basis claims fell -5.8% versus an expected -5.6% and are down -10.1% YOY, consistent with ongoing tightening in the labor market.

Continuing claims rose 21,000 to hit 1.741 million; the previous week was revised lower by -6,000. The four week moving average of continuing claims fell -13,250 to 1.728 and is now sitting at a new low (with revisions) dating back to 12/8/1973. This figure continues to trend lower and is consistent with ongoing tightening in the labor market.

The total number of Americans receiving unemployment benefits fell -31,381 to hit 1.600 million. This figure has fallen to a long-term seasonal low in line with expectation. On a year over year basis, it is down -10.8% and consistent with labor market tightening. Looking forward I expect to see this figure bounce over the next two months or so, and then fall to another new seasonal/long-term low.

The Dollar Index

The Dollar Index fell another quarter percent in the wake of yesterday's monumental ECB revelation. Now the ECB and FOMC are on a convergent path, a path in which outlook for future FOMC rate hikes has dimmed while ECB outlook has brightened. The index is now sitting on support at the $93.30 level, just above the short term moving average, and indicated lower. Both indicators are bearish and pointing lower and suggest support will be tested again if it is broken a move to $92.15 or lower is likely.

The Gold Index

Gold prices held steady in today's trade. The metal closed with hardly any movement after trading up within a narrow range. Despite the upward bias to today's action the metal is still below resistance targets and showing signs that resistance is present at those targets, just above $1,300. The indicators are bullish and suggest $1,300 could be tested again, but they are weak and do not lead me to think a break above $1,300 is coming. Based on the chart it looks more likely that prices will fall from the short-term moving average, confirming resistance at the bottom of the Jan/May trading range and reversal within the greater long-term trading range. A move below $1,290 would be bearish and could take spot price down to $1,260.

The Gold Miners ETF GDX fell in today's session, showing once again that there are sellers above $22.50. The ETF created a small red candle, but the action is more sideways than not, forming to the side of yesterday's candle and exactly at the mid-point of the long-term trading range. The indicators are bullish, but the candles continue to show signs of bearishness so I would expect to see range bound conditions persist in the near term at least. A move lower may go as low as $22, a move higher as high as $23. The caution, for now, is two-fold; the first is the geopolitical risk in the G7 meeting, the second is dollar risk with the FOMC and ECB meetings next week.

The Oil Index

Oil prices surged on a report Venezuela's major oil ports are a month behind on filling contracts. This news cast new light on the economic and oil crisis in the country and helped lift WTI more than 1.5%. The caveat is that US production rose again and hit a new all-time high and that OPEC is talking about lifting production caps to ease the strain, two factors that do not support higher oil prices. WTI is now trading near $66 but has yet to surpass resistance at the $66.50 level. A move above that level would be bullish but does not look likely at this time without another catalyst.

The Oil Index is bouncing from support and moved higher in today's session. The index created a small green candle that met resistance at 1,550 that could cap gains in the near term. The indicators are mixed but rolling into a bullish signal, in line with the prevailing trend, so a test of resistance should be expected at least. The risk is oil prices, if prices can rebound a move higher in the index is likely but if not a move back to firmer support, down near 1,500, is possible.

In The News, Story Stocks and Earnings

Facebook was one of the worst-hit stocks in today's trading as news it has data deals with several Chinese based companies spreads through the market. One of the companies, Huawei, has been flagged as potential National Security threat. Facebook has pledged to wind down those deal, many of which were put in place years ago, but the question of how many other data threats exist within the social network ecosystem remains. Some late day news that a bug revealed more than 14 million private posts to the public does not work in Facebook's favor. Shares of FB fell more than -1.5% to close at a one week low below $190.

J.M. Smuckers reported earnings before the bell, and it was not a sweet surprise. The company missed revenue and earnings estimates as lower volume and product mix offset expected earnings. Most business segments were flat over the same period last year except for US retail consumer foods which fell -2%. The good news is that margins improved in all metrics positioning them for solid performance should volume increase. Shares of the stock fell more than -5% to find support at the one year low.

The VIX advanced in today's session at once confirming support and resistance. The move created a small green bodied candle with visible upper and lower shadows indicative of indecision or, as perhaps is the case here, the potential for range-bound trading. The candle shows support at the long-term low and suggests the market is not quite ready to commit to rally; it also shows resistance just below the moving averages which suggest the market is not ready to sell-off and head for the hills either. The long-term outlook is still good enough to offset the near-term fear, the question is which way the balance will tip and will it will happen.

The Indices

The market moved lower on what looks to me like simple profit taking. Sure, the move was led by Facebook and may have been sparked by the latest data news, but there are other reasons to sell, reasons like the tech sector and index are at a new all times, well ahead of the broader market, and ripe for plucking. The NASDAQ composite led the day's losses with a decline near -0.70% and created an ominous looking candle. Today's candle is not extremely large, but it is red, fully engulfs the previous candle and forms a Dark Cloud Cover. This is a sign of bearish reversal that will likely lead to consolidation if not a correction in the range of 1% to 3%. The only good thing about today's candle is that it found support at the 7,600 level, a previous all-time high.

The Dow Jones Industrial Average crept up to set a new three month high. The blue chips closed with a gain near 0.40% and created a small green candle. The candle is not strong but is above resistance, resistance that is now a support target, and confirmed by the indicators. The indicators are bullish and pointing higher in line with the trend, so higher prices are likely. A move up may find resistance at 25,500 but, once broken, the all-time high will be within reach.

The Dow Jones Transportation Average closed with a gain if a small one, 0.03%. The index created a small doji candle well within the near term consolidation range and does not look like it is ready to break out. The indicators remain bearish, but they have begun to flatten (MACD) and indicate support (stochastic %K ticks higher) at this level. A move up in price would be trend-following and bullish if it broke resistance at 10,900.

The S&P 500 closed with a loss of -0.07% after moving up to set a new three month high. The index is drifting higher in the near term, in line with the trend, and the move is supported by the indicators. Both stochastic and MACD are bullish and pointing higher, consistent with rising prices, and suggest further upside is on the way. The caveat is that momentum remains weak and there is now a sign of resistance at the 2,775 level (today's candle). A move above resistance would be bullish and likely go as high as 2,800 before hitting the next pocket of resistance.

The market is anxious, and it is no wonder, we are on the brink of major geopolitical change either good or bad. The good news is that trade wars are averted, there is a major bull market catalyst brewing right now. The bad news is that, if trade wars aren't averted, there is a trade war brewing, but you already knew that. Because it is in the best interest of all parties to reach an agreement I think there will be one; maybe it will happen this weekend. Beyond that, economic and earnings outlook remains positive, so I remain firmly bullish for the long term and cautiously bullish for the near.

Until then, remember the trend!

Thomas Hughes

New Option Plays

Time to Rest

by Jim Brown

With extra event risk this weekend, it is time for the markets to rest. All the major indexes are up strongly for the week despite the decline in techs and small caps. With techs and small caps in overbought territory and the Dow closing in on the next resistance level at 24,500 we could see a little more event risk selling than normal ahead of some important events. The G7 conference for President Trump will be on Friday and other participants have already promised "blunt talks on trade" and there could be a flurry of negative headlines. On Sunday the President leaves for Singapore for the Korean summit. There will be no shortage of headlines on that topic. It could blow up literally or figuratively at any time. Kim Jong Un has already claimed there is a plot underway to assassinate him at the summit. These next five days will not be dull and then the Fed rate announcement is Wednesday. Historically that means Tuesday is normally positive but the Korean summit will control the market.

New positions are only added on Wednesday and Saturday except in special circumstances. NEW DIRECTIONAL CALL PLAYS

No New Bullish Plays

NEW DIRECTIONAL PUT PLAYS

No New Bearish Plays

In Play Updates and Reviews

No Surprise

by Jim Brown

The recently hot Nasdaq and Russell cratered and the big cap Dow rallied after China offered a trade deal. I warned yesterday the Nasdaq and Russell had entered overbought territory and were due for profit taking. I have written before that once the tariff worries passed the Dow stocks would rally as investors rotate out of small caps. I also warned that stocks could decline ahead of the weekend because of all the headline events on the calendar. All of that is coming true. However, a one-day decline after big gains is not a major reversal. One day is just profit taking.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow.
We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green.
We need to always be prepared for a profit exit at resistance.

Current Position Changes

BABY - Natus Medical
The long position was stopped at $35.85.

If you are looking for a different type of option strategy, try these newsletters:

A proxy war has broken out over the effort by activist shareholder Voce Capital to replace the chairman and elect two directors to the 6 person board. The company sent a fiery letter to shareholders pleading with them to vote with the company recommendations and reelect the directors. The letter threatened an ugly future if Voce gains control. The letter was sent on Monday and shares have imploded. We were stopped at $38.85 for a minor loss. The shareholder meeting is June 22nd and we will likely play BABY again if the company's directors are reelected.

Original Trade Description: May 30th

Natus Medical Incorporated provides newborn care, neurology, and hearing and balance assessment healthcare products and services worldwide. It offers products and services used for the screening, diagnosis, detection, treatment, monitoring, and tracking of common medical ailments in newborn care, hearing impairment, neurological dysfunction, epilepsy, sleep disorders, neuromuscular diseases, and balance and mobility disorders. The company provides computerized neurodiagnostic systems for audiology, neurology, polysomnography, and neonatology; and software systems for managing and tracking disorders and diseases for public health laboratories. It offers diagnostic electroencephalography (EEG), ambulatory EEG, and long term monitoring, intensive care unit monitoring, electromyography, sleep analysis or polysomnography, intra-operative monitoring, and diagnostic and monitoring transcranial doppler ultrasound technology systems. The company also provides hearing screening products to screen the hearing; diagnostic hearing assessment products to screen for or diagnose hearing loss, or to identify abnormalities affecting the peripheral and central auditory nervous systems; balance and mobility systems to diagnose and assist in treating balance disorders; and thermoregulation products to control the incubators and warmers. In addition, it offers jaundice management products to treat jaundice; brain injury products to diagnose the severity of brain injury; NICVIEW, a live streaming video for families with babies in the neonatal intensive care unit (NICU); and essential products used in the everyday operation of NICU. Further, the company provides computer-based audiological, otoneurologic, and vestibular instrumentation and sound rooms to hearing and balance care professionals. It serves hospitals, clinics, laboratories, physicians, nurses, audiologists, and governmental agencies. Company description from FinViz.com.

If you parse that guidance along with Q1 earnings of 24 cents, only 50 cents of earnings comes from Q1/AQ2. That means they are going to see an earnings surge of $1.00-$1.10 in Q3/Q4. Since Q4 is normally their strongest quarter with hospitals trying to spend out their budgets that is entirely possible.

Natus is also gearing up for a proxy fight with Voce Capital Management, which owns 2% of the shares, and is planning on nominating board members to replace 50% of the board. Activist investors are always good for lifting the stock price.

The CEO said order backlogs are at record levels and activity remains robust.

Earnings July 25th.

Shares are right on the edge of a breakout of a five month consolidation pattern.